One in four businesses fail due to cash flow problems.1 And despite forewarning, many business owners are underprepared to manage the ups and downs. During lean times, watching the bank account dwindle and worrying whether you’ll make it through the next payroll cycle.
During flush times, feeling an almost irresistible urge to spend on a strategic upgrade that will help you take the business to the next level.
While you may not be able to predict every cash flow change, here are five ways to prepare your business to stay on track through the twists and turns.
KNOW YOUR FLOW
The best way to manage cash flow problems is to prepare to avoid them altogether. Start by working with a financial professional, who can guide you in determining how much cash is flowing into and out of your business each month.
Look at your expenses and income over the last six months and if the numbers appear fairly steady, calculate the averages. If your business is seasonal, pick a six-month period that includes your highest expense and income month(s) and calculate accordingly. Armed with this information, you can create a budget that helps keep your business in the black.
Cash flow slowdowns are inevitable in any business, so there will be times you’ll need extra cash to tide you over. Building a cash reserve is critical. Set aside at least enough to cover three months’ worth of expenses but aim for six months to feel really secure.
ESTABLISH A LIFELINE
Do you know your terms with your suppliers? The best time to set up a grace period is before you need it. Talk with your vendors to see whether you can extend your payment terms out by 30 days or more in a cash flow crisis. If you’ve established a good relationship with them by paying on time, they may be amenable to giving you a break when you need it.
GET HAWKISH ON RECEIVABLES
Past due invoices are a major irritant for businesses—and a key reason why positive cash flows go negative. Make it a priority with your team to get timely payment from your customers. Track your receivables on a weekly basis and have a system to follow up immediately on past-due invoices. Consider adding a small discount to motivate customers to make early payments.
OPEN A LINE OF CREDIT
Establishing a line of credit with your financial institution is a good strategy. In addition to helping you cover a cash flow downturn, you can use financing to underwrite growth opportunities—new equipment, more staff, an additional site—rather than using cash on hand or depleting your reserves, and suddenly finding yourself cash poor.
Cash is the lifeblood of your business. Managing its flow is critical to helping your business achieve and maintain success for many years to come.
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1: 5 Ways to Tackle the Problem That Kills One of Every Four Small Businesses. Money.com. 2015